Medical School Loans: Reducing the Burden of Debt

It's a frightening figure but, on average, medical students graduate about $100,000 in debt. Spiralling tuition costs are the principal reason for the preponderance of high- interest rate debt in this figure. The low-interest Federal Stafford loan is insufficient to meet the heavy costs of a medical course, thus the reliance on high-interest private loans. The earning potential of medical students, together with a very low drop-out rate at medical school, also contribute to this disproportionately high ratio of unsubsidised loans to total debt. Lenders are more than ready and willing to make higher-rate loans available to medical students, even those with bad credit, as they perceive a low risk of default.

Medical school loans, therefore, are readily available, but young physicians are faced with increasing difficulty in paying their college student loans and medical school loans. Medical schools are under pressure, too, to either reduce costs or find creative ways to assist students finance their debts. This pressure has to be seen against the backdrop of private medical schools' costs rising by 168% over the past two decades, and public medical schools' costs by 312% over the same period.

But medical students themselves will need to come up with creative solutions to their indebtedness problem. Let's put this in context: yes, medical student indebtedness is at an all-time high but, no, loan repayment as yet does not represent a serious hardship for most physicians. A medical degree is still considered an excellent investment.

However, a black cloud is looming on the horizon. Congress passed the Deficit Reduction Act on February 1, 2005 approving $11.9 bn. cuts in student loans funding over five years. On July 1, 2006 most of the legislation will be implemented marking a return to higher loan interest rates. Recently, rates had fallen very low with Stafford Loan interest rates in the 3-4% range. Now they are set to rise to 6.8%. In the light of such increases, medical professionals will need to review their options in order to reduce their debt burden.

So, what options are available? There are two principal routes you can go down; first, reduce your monthly repayment and, second, reduce or eliminate the principal balance. The first, consolidation, can be a particularly useful one to follow with a view to future credit ratings. Since your credit score will be evaluated on a loan repayment to income ratio, it makes sense to reduce your monthly repayment. To secure prime rates on home loans you need to ensure your credit rating is as high as possible.

Consolidation makes even more sense given that, on July 1, student loan consolidation rates are set to soar. At present, consolidation rates can be as low as 2.75% with benefits applied. The best advice is to get your application in early, it can take a month or more to be processed so be prepared well in advance to meet the July 1 deadline. Once completed, you'll not face the possibility of any future rate rises.

Is consolidation of medical school loans always the best option, though? As well as improving a medical graduate's credit score, consolidation is simple and convenient requiring just one loan payment each month instead of many; it saves you money because you make one monthly payment smaller than the sum of your multiple loans repayments, and, finally, you could be granted the option to defer payment in addition to benefiting from extra repayment opportunities.

That's the good news. For medical students with substantial medical school loans, debt consolidation can be the financial equivalent of death by a thousand cuts. The Student Assistance Act of 1965 has allowed students with very large loans, and medical students from less affluent backgrounds fall increasingly into this category, to extend their repayments over a period of up to 30 years. The interest, though, for such a long tenure, is very high: it's entirely possible to more than double the total interest cost. Remember, too, that once you go ahead with a consolidation deal there is no reverse gear, and so it's vital that you do your research and make sure consolidation is the best way forward for you.

Let's now look at the second route: reducing/eliminating the principal balance by virtue of loan forgiveness programs. Medical professionals may qualify for student loan forgiveness programs. In return for working in low-income communities, or conducting medical research through a special program offered by the US National Institute of Health, part or all of the loan debt is forgiven or cancelled. The actual amount depends on the period of service undertaken.

Service in the armed forces represents another avenue of relief for some medical students. Unfortunately, there is a limited availability of places on such programs. However, medical school loan debt can be reduced by undertaking voluntary work either through the Americorps or Peace Corps Programs. Americorps volunteers receive an education award of $4,725 for a year of full-time community service which can be offset against medical school loans repayments. Peace Corps volunteers are eligible for a 15% cancellation of their outstanding student loan balance for every year they spend overseas on Peace Corps service. Always check first to determine your eligibility for the above schemes: their availablity is contingent upon the specific medical school loans program you have.

As we have seen, increases in tuition seem likely to continue, and increasing indebtedness is almost a certainty. While, currently, there seems to be little serious hardship for most physicians in repaying their medical school loans, present trends would indicate the situation is set to worsen. For an increasing number of medical professionals, burdened with substantial loan debt, it will be less a question of soldiering on without consolidation or loan forgiveness programs and more a matter of choosing between the two.